Cooter and Ulen on Tort

Chapter six on Tort: what is an efficient system of tort?

Discussion of a simple model: cost of precaution and cost of

harm given a certain activity ;
p. 199 ff.

Extended model: include activity levels ;

p. 211 ff.

More complex model: errors and administration costs ;

p. 217 ff.

And additional complications (chapter seven).

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Damages to body, reputation, privacy rights, ..

Tort, from tortus (twisted): a wrong, other than breach of contract

or invasion of property that subjects the wrongdoer to civil liability
under the common law or statute.

Legal perspective: some damages cannot be covered by

property law: it does not concern property (but damages to body,
reputation, etc.); nor is it possible to sue under contract law:
there is no broken promise. Or, there is no remedy (injunction).

Large losses escape contract or property law: BP in Gulf Mexico!

Need for a third body of law: TORT LAW

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Some examples:

People harm each other by means of:

Exploding bottles
Side-effects of medicine
Failing software, loss of data
Collision on roads
Damage to reputation in the newspaper
Damages while parking a car
Invasion of privacy, etc.

Legally, the wrong needs to be undone, compensated

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Two types of torts

1. Intentional, also dealt with by criminal law

2. Unintentional: accidents

Tort law is mostly accident law

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Economic perspective

1. Coase theorem: regardless the legal assignment of property

rights, the allocation of resources will be efficient when
transaction costs are zero and property rights defined.
2. However, sometimes there are damages that cannot be dealt
with efficiently because transaction cost are too high, i.e.
speeding versus the probability of accidents. Obstacles to
bargaining.
3. Lowering transaction costs and bargaining: no solution; thus:
4. Economic purpose of tort law is to internalize externalities
created by high transaction costs.

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Topics of this lecture

Traditional legal theory of tort

Economic perspective on the purpose of tort law
Liability rules and the economic purpose of tort law
Unilateral and bilateral precaution
Strict liability and negligence
Simple negligence, contributory negligence, comparative
negligence, strict liability and defense of contributory
negligence
Complication: the activity level
Setting legal standards at the level of efficient precaution

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Traditional legal theory of tort: negligence

Three elements:

Harm act caused harm the act was a breach of duty

Harm (not risk to harm): tangible and intangible losses

Cause (proximate): use the but-for-test to determine causation
and then determine closeness between act and harm.
Breach of duty: the duty to take reasonable care was breached

Empirics: strict liability negligence strict liability - negligence

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Breach of a duty

F o rb id d e n z o n e P e rm itte d z o n e
x < x* x > x*

0 x

x*
P re c a u tio n

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Economic theory, harm is: externality
We need: internalization

P ric e T o tal m arg in al c o s ts

B S o c ia l m a rg in a l c o s ts o f p ro d u c tio n
M C (in d ivd u al m arg in al c o s ts )
C
o
P
m
P A

o m Q u a n tity
Q Q

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Solutions to externalities:

Four solutions: Taxes, regulation, criminal law, and tort law

Tort law internalizes the cost of harm; injurer must

compensate victim and will invest in precaution

Different perspectives lawyers and economists:

Lawyers: compensation of damages is first purpose

Lawyers: wrong / accident has taken place, it is ex post
Economists: optimal prevention of accident is first purpose
Economists: perspective is ex ante, prevent more accidents

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 Economic methodology of optimization

Usually (see also chapter 2, section IV, D) :

1. Maximize difference between total revenues and total cost p. 231

2. Equalize marginal cost and marginal benefits (Cooter, p. 201)

Law & Economics:

3. Minimize the social cost of accidents (Cooter, p. 200)

Cooter: math.; here: diagrammatic and numerical example

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Minimizing total social cost of accidents

E x p e c te d to tal
s o c ial c o s ts o f ac c id e n ts

P re c au tio n
c o s ts

E x p e c te d ac c id e n t c o s ts

*
X U n its o f c are

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First perspective: minimizing total social cost accidents

We assume:
- precaution reduces probability or magnitude of
accidents
- constant cost of precaution; increasing more likely?

We find:
- without precaution, accident costs at its highest;
- precaution reduces probability accident takes place;
- total expected costs minimized at X*;
- no zero level of accidents: optimum is a balance.

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First perspective intuitively reasonable

The other two economics perspectives the same outcome:

Going from no precaution to more precaution, we search for
precaution that is cost-justified. How?

Equalizing marginal cost and marginal benefits, which

amounts to (and benefits are reduction in costs!):
Maximizing the difference between total benefits and total
costs.

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T o ta l p re c a u tio n c o s ts

T o tal b e n e fits

M a x im u m n e t b e n e fits - c o s ts

0 X * P re c au tio n

M a rg in a l c o s ts o f p re ve n tio n

M a rg in a l b e n e fits
0
X * P re c au tio n

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Numerical example:

We assume:
Extra units of care, probability of accidents decreases
No care: probability of accident is 50%, or p = 0,5;
If accident takes place: accident costs are 1 billion (or
$ 1.000.000.000); thus expected costs are 500 million
if probability is 50%.
MC = marginal costs; TCC = total costs of care; MB =
marginal benefits; TB = Total benefit; NTB = Net total
benefit; TC = Total societal costs = accident cost +
precaution costs.

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UNITS MC TCC P pD MB TB NTB TC* =
of Care mln $ mln $ mln $ mln $ mln $ mln $ (pD+TCC)

0 0 0 0.5 500 0 0 0 500

1 10 10 0.2 200 300 300 290 210
2 15 25 0.15 150 50 350 325 175
3 20 45 0.12 120 30 380 335 165
4 28 73 0.095 95 25 405 332 168
5 40 113 0.008 80 15 420 307 193
6 60 173 0.007 70 10 430 257 243

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Conclusion:

Optimum is 3 units of care:

minimum total societal accident costs (expected

accident costs + precaution costs)
equalization of marginal cost and marginal benefits;
we maximize the difference between total benefits and
total costs (as with all resources)

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Relevance of the different methods

How to determine the legal standard p. 215 ?

1. Case-by-case approaches (decisions by judges: mc=mb)

2. Regulations and administrative law (TKmin; [TB-TK]max)

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 Tort law casuistry: many distinctions
Many possible assumptions on cases and law:

Harm: unilateral or bilateral harm

usually we assume unilateral harm (but for 216)

Accidents: one or more parties cause the accident

usually we assume unilateral accidents (injurer)

Negligence: duties broken by one side or both sides (205-217)

Precaution: unilateral, bilateral: crucial distinction

one or more parties can and should take precaution

Precaution: bilateral, but redundant (see 207)

Activity level: precaution over action or activity level (211/212)

System costs: administration and errors (217-225)

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Line of reasoning followed by Cooter / Ulen

1. Unilateral accident unilateral / bilateral precaution

2. Take two possible systems (no liability strict liability)
3. Conclusion: a third system is necessary (negligence)
4. Differentiate negligence (contributory, comparative)
5. Differentiate strict liability (+ contributory negligence)
6. Complicate the argument (activity levels: one, both)
7. System costs and alternatives

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Liability rules and the economic purpose of tort law

Do liability rules create incentives to bring the efficient level of precaution

about? Distinguish between:

1. No liability;
2. Strict liability: sometimes two elements sufficient to establish liability in
tort for the defendant: harm and act that caused the harm (products and
abnormally dangerous activities);

3. Negligence: three elements: there must be a breach of a duty she owed

the plaintiff; this breach caused the harm. Defense is permitted that all
standards of care were applied.

First, compare No liability and Strict Liability and one party that
can take precaution to prevent an accident.

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But first,

Assumptions:

Decision makers are rationally self-interested

We abstract from regulations reducing externalities
There is no insurance
All injurers are solvent and pay damages in full
Litigation costs are zero

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Variables, compare the diagram:

WX = precaution costs
P(x)A = expected accident costs
P(x)D = expected compensation damages

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Efficient liability rules: what will the victim do?

Minimize total (net) costs: = WvXv + p(Xv).A - p(Xv)D

WvXv + p(Xv).A = total social cost of accidents
p(Xv)D = perfectly compensatory damages

No liability for accidental injuries: victim bears all costs and

minimizes its cost by choosing the efficient level of precaution.
Strict liability: assume perfect compensation (!), unrealistic but
analytically convenient. Victim receives perfect compensation for all
damages (D=A). Cost minimization by taking zero precautions
(choose to Xv minimize WvXv): no incentive to take precautions.

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Efficient liability rules: what will the injurer do?

Same reasoning:
No liability: if the injurer is not liable she minimizes cost by
taking zero precautions.
Strict liability: if the injurer is strictly liable for perfect
compensation, the injurer minimizes her total cost by taking
efficient precautions.

Conclusion: if only the victim can take precaution, then no

liability provides efficient incentives for precaution; if only
the injurer can take precaution, then a rule of strict liability
provides efficient incentives. But suppose both parties can
influence accidents and its costs?

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What if accidents can be prevented bilaterally

Social cost function becomes:

SC = wvxv + wixi + p(xv,xi).A

No liability: only victim takes precaution, but accident is

bilateral and cost minimization requires injurer to take
precautions also.

Strict liability: only injurer takes precaution, but cost

minimization requires the victim to also take precautions.

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Solution: Negligence rule

Negligence rule: imposes a legal standard of care that must

be complied with to avoid liability.

Assume:
A fixed standard of care
Legal standard equals the efficient level of precaution

Negligence rule gives efficient incentives for precaution:

- in case both parties can influence accident costs
- courts can determine the efficient legal standard of care

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Diagrammatic explanation: what will the injurer do if a
negligence rule applies?

F o rb id d e n z o n e P e rm itte d zo n e
x < x* x > x*

E x p e c te d to ta l
s o c ia l c o s ts o f ac c id e n ts

P re c a u tio n
c o s ts

A c c id e n t c o s ts

*
X U n its o f c are

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If a negligence rule applies, the incentives are:

Injurer: Victim:

Permitted zone, injurer not Permitted zone: injurer is

liable, takes no further not liable, victim behaves
precaution. Injurer as if a rule of no liability
minimize costs at X*; applies. Victim internalizes

Forbidden zone, injurer cost and benefits of

bears costs of accidents + precaution, which gives

precaution. Minimum costs efficient incentives for

when injurer chooses the precaution.

efficient level.

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Preliminary conclusion:

Dilemma was: usually both sides can influence accidents costs,

how can a liability rule give efficient incentives for precaution
to both the victim and the injurer.

In general, a negligence rule that induces the injurer to

escape liability by satisfying the legal standard of care provides
incentives for efficient precaution by the victim. But the
precaution costs may be duplicative, as a consequence of
transaction cost being too high to bargain the efficient level of
precaution costs (p. 207) .

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 Different forms of negligence rules:

So far:

1. Simple negligence: precaution below the efficient level: liable

(we disregard the victims precautionary behaviour); But also,
2. Negligence with defense of contributory negligence: imposes
legal standard on victim: escape liability by proving that the
victims precaution fell short of the standard.

One party bears all cost of harm, even though both are at fault!

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And,

3. Comparative negligence: responsible for damages in

proportion to the contribution of their negligence to the
accident (for most accidents in US!); and,
4. Strict liability with a defense of contributory negligence:
here the injurer is liable for all damages unless the victim is
negligent (abuse of consumer products).

Equivalence theorem: all forms of negligence give incentives

for efficient precaution provided
- a legal standard set equal to the efficient level of care;
- perfect compensatory damages

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Equivalence theorem

If perfect compensation and efficient legal standard:

1. One party can escape liability by conforming to the standard;

2. This party will take efficient precaution to avoid the cost of harm.
3. The other party is responsible for the cost of harm, thus
internalizes those costs which creates incentives for efficient
precaution

(almost a tautology?)

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Summary: incentives for efficient precaution?

LEGAL RULE VICTIM INJURER

No liability Yes No

Strict liability No Yes

Simple negligence Yes Yes

Negligence + contributory negligence Yes Yes

Comparative negligence Yes Yes

Strict liability + contributory negligence Yes Yes

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 Complication: Activity Levels

So far:
If precaution is bilateral: prefer negligence rules.
Which one: indifferent if perfect compensation and efficient standard.

However:
Accidents are lowered by taking more precautions at the activity nd
by lowering the number of activities generating the accidents.
Probability of harm is determined not only by precaution, but also by
the activity level that creates the harm. Which liability rule gives
incentives for the choice of efficient activity levels?

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Efficient activity level?

Simple negligence rule: no: escape liability when

conforming to the efficient level of precaution no matter
how high the activity level. Marginal risk of harm is
externalized!

Strict liability: yes: if strictly liable, all cost are

internalized, irrespective if the cause is lack of precaution
or level of activity.

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Or generally, choice of efficient activity level

VICTIM INJURER

No liability Yes No

Strict liability No Yes

Simple negligence Yes No

Negligence + contributory negligence Yes No

Comparative negligence Yes No

Strict liability + contributory negligence No Yes

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L&E - Prescription for lawmakers (activity levels)

1. Unilateral accidents: systems of no liability or strict liability

provide incentives for efficient precaution;
2. Bilateral accidents: negligence systems provide incentives
for efficient precaution better than no liability or strict
liability;
3. Whos activity level affects accidents most? Let that party
bear the residual cost of accidents by choosing the
appropriate liability rule.

However, bearing residual cost is for either the one party, or

the other. No incentives for the non-residual cost bearer.

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Setting the legal standard when you are at fault

So far:
We assumed: courts determine the standard of care at
the efficient level.

What do judges do in practice?

Judge Learned Hand rule to determine negligence

Case concerned loss of a barge in NY harbour.

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Learned Hand rule:

Negligence and liable if:

B < pL

B = burden of precaution
P = probability of harm
L = amount of losses
pL = expected damages
Liability for damages when the cost of precaution are
lower than the expected damages: barge owner negligent!

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Learned Hand formula suggests LH, it should be X*

E x p e c te d to tal
s o c ial c o s ts o f a c c id e n ts

P re c a u tio n
c o s ts

A c c id e n t c o s ts

*
LH X U n its o f c are

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Dutch High Court: Kelderluik-arrest NJ 1966, 136

Sjouwerman, driver for Coca Cola Corporation, opened

a trapdoor in Amsterdam pub De Munt. Trapdoor in
front of toilets. Takes three crates from the cellar, puts
them before the opened trapdoor and looks for more
empty bottles behind the bar.
Visitor Duchateau falls in the cellar and breaks his leg;
sues Coca Cola.
Lower courts: Duchateau should have been more
careful, crates before the trapdoor. Higher court:
50/50% blame. Coca Cola appeals: she did not have to
take into account reckless behaviour by Duchateau.

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Dutch High Counsel (highest court)

High Counsel dismisses the appeal:

One should take into account:

1. Probability of someone not taking care;

2. Probability that an accident might take place;
3. Seriousness of the consequences of an accident;
4. How hard it is to take precautions.

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And more arguments when deciding on liability

Administrative Cost of the System: trade-offs

Ease of adjudication versus number of cases (strict liability

versus negligence);
Cost of adjudication (simple and broad rules) versus the
cost of errors;
Ease of adjudication (precise rules) versus case-by-case
approach (imprecise standards), and more.

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